Tax help for property damage

Dear Tax Talk,
My mother had complete water damage with her house. How much can she declare in a loss? How is that deducted and which form do you use?
-- Rebecca

Dear Rebecca,
When disaster strikes, I hope you're insured for your loss. If you're not fully insured, you can claim a casualty loss on your taxes, but it hardly amounts to much of a benefit and certainly doesn't come close to full reimbursement. Casualty losses are reported on Form 4684 and flow to your individual return on Schedule A as an itemized deduction.

First, you have to measure the casualty loss. Your loss is measured as the lesser of:

1. The cost of the damaged property or
2. The difference between the value of the property before and after the disaster.

The easiest way to measure the decline in value would be to tally the cost of the repairs if the property is fully restored to its previous condition. If the repairs aren't done, for example, if your mother just decided to sell the house with the damage, she would still have a loss based on the decline in value. Presumably, she also would receive less for the home.

After you determine the amount of the loss, you reduce it by $100, which isn't so bad. But the really bad part is that you have to reduce your loss by 10 percent of your adjusted gross income. After the AGI reduction, the net amount flows to Schedule A and is combined with your other itemized deductions.